Fed Prepared to Ease Further to Revive Economy

The Federal Reserve said it’s willing to ease monetary policy further to spur growth and support prices while refraining today from expanding its holdings of securities.

“The committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate,” the Federal Open Market Committee said today in a statement in Washington.

Policy makers said the pace of recovery and job growth have “slowed in recent months.” The committee also said “measures of underlying inflation are currently at levels somewhat below those the committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability.”

The dollar fell and stocks rose on speculation Chairman Ben S. Bernanke will purchase additional U.S. government securities in coming months in an effort to lower long-term interest rates. The FOMC retained its stance from last month of keeping its portfolio stable at around $2 trillion to keep money from draining out of the financial system.

“Inflation is likely to remain subdued for some time before rising to levels the committee considers consistent with its mandate,” the statement said.

Kansas City Federal Reserve Bank President Thomas Hoenig dissented for a sixth straight meeting, tying a record for most consecutive dissents at regular FOMC meetings since 1955 because he “believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted.”

U.S. central bankers are on guard against an economy that may be stuck at a pace of growth that won’t generate higher levels of employment for years to come. Fed officials in June forecast the unemployment rate would be in a range of 6.8 percent to 7.9 percent by 2012.

Recession Ends

The National Bureau of Economic Research yesterday said the worst recession since the 1930s ended in June 2009. Unemployment in the U.S. may stay above pre-recession levels until at least 2013, the Organization for Economic Cooperation and Development said in a report the same day.

Gross domestic product expanded at a 1.6 percent annual rate in the second quarter, and St. Louis forecasting firm Macroeconomic Advisers estimates growth is tracking at a 1.4 percent annual rate for the third quarter.

“The economy should continue to grow, albeit anemically,” Dan Greenhaus, chief economic strategist at Miller Tabak & Co. in New York, said before the announcement. “The question for Fed members is, to what degree can monetary policy help the economy grow from here?”

Bernanke told central bankers gathered in Jackson Hole, Wyoming, on Aug. 27 that “preconditions for a pickup in growth in 2011” appear to be in place. Even so, policy makers are “prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly.”

Erosion of Confidence

Bernanke said the benefits of a resumption of large-scale asset purchases must be weighed against risks that include an erosion of public confidence that the Fed will be able to reduce its balance sheet and prevent a surge in inflation.

Since Bernanke’s Jackson Hole speech, reports on retail sales, manufacturing and employment have tempered investor concerns that the economy is at risk of sliding back into a recession.

Retail sales rose in August for the second consecutive month, and the Institute for Supply Management’s factory index rose to a three-month high. Companies in the U.S. added 67,000 jobs last month, more than forecast by economists.

The Standard & Poor’s 500 Index has rallied 7 percent since Bernanke’s Aug. 27 speech and is up more than 2 percent this year. The yield on the 10-year Treasury note has fallen 1.17 percentage point to 2.66 percent since Jan. 1.

Consumer Spending

Even so, the pace of payroll growth is too slow to make up for the loss of more than 8 million jobs caused by the recession or spur the consumer spending that makes up more than 70 percent of the economy.

Memphis-based FedEx Corp., the second-largest U.S. package-shipping company, said last week it will eliminate 1,700 jobs as it forecast earnings for the current quarter that fell short of analysts’ estimates.

“If you are outside the workforce right now, the door is barely cracked open,” John Challenger, chief executive officer of Challenger, Gray & Christmas, a Chicago-based outplacement firm that helps 5,000 to 10,000 workers a year find new jobs, said before the announcement.

Consumer confidence fell in September to a one-year low, according to an index compiled by Thomson Reuters and the University of Michigan.

Companies have little pricing power after the recession ravaged incomes and household finances. The consumer price index, minus food and energy, rose 0.9 percent for the 12 months ending August.

“Our customer remains challenged,” William Simon, president and chief operating officer of Wal-Mart’s U.S. operations, said at an analyst presentation Sept. 15. “We need to figure out how to operate in this environment.”

Household wealth in the U.S. fell 2.8 percent in the second quarter as share prices were depressed by the European debt crisis, according to the Fed’s Flow of Funds report on Sept. 17. The Census Bureau said last week that the number of Americans living in poverty rose to 43.6 million, the most in 51 years.

Gross domestic product will expand at an average annual pace of 2.5 percent next year, according to the median estimate in a Bloomberg survey of economists this month, down from a forecast of 2.8 percent in early August.

“The longer you have weak growth the longer you have no underlying healing in your economy,” Ethan Harris, head of North American Economics at Bank of America-Merrill Lynch, said before the announcement. “You don’t heal the housing market, you don’t heal the household balance sheet. By allowing growth to sit below trend, you create a huge window of vulnerability to a shock.”